Before you incorporate, make sure you are aware of the implications for your legal position, your taxes, and possible employees. Incorporating can bring benefits if done properly.
C Corporation Defined
A corporation is a legal entity that can carry on a business independently of the individuals running it. This characteristic makes a corporation an ideal vehicle for starting a business with big potential for growth. Depending on the kind of corporation you set up, it can affect your liability and your taxes.
C corporations provide the most complete separation between owners and the business. For instance, I taxed separately business income and personal income. And as long as the company observes all proper corporate formalities, individual shareholders, directors, and officers cannot be personally liable for the company’s debts. Most large corporations are C corporations, but there are also benefits for small businesses, depending on your specific goals. You must keep extensive records and comply with complicated regulations.
Other types of business entities can be easier to operate, but may be subject to stricter regulations. Get more information on how to start a business and incorporate from ZenBusiness, and launch your business the easy way.
C Corporations vs. S Corporations
The names C corporation and S corporation come from the tax code subchapters that define how corporations pay their taxes. When you incorporate, your business is a C corporation by default, and you must make a separate application to become an S corporation. S corporations have much stricter guidelines.
An important difference for business owners is that the income from C corporations is taxed twice. The government collects income tax on the business revenue at the corporate level, and the shareholders pay income tax on the dividends the company issues from its profits. Thus, the business’s income is taxed twice, which is called “double taxation.”
S corporations are taxed on a pass-through basis. The business income passes through to the shareholders without first being taxed at the corporate level, and the shareholders pay the income tax. It’s always worth discussing your circumstances with an accountant who understands your financial goals.
A second difference lies in the restrictions applied to S corporations. While C corporations can have any number of shareholders, S corporations must have 100 or fewer, and have only one type of stock. In general, only American citizens can be shareholders. A few specified organizations such as trusts can also own shares.
This means it’s easier for C corporations to raise money from investors, and there are fewer limits to their growth. Depending on your plans for your business, the shareholder limitations could be an important factor in your decision.
C Corporations vs. LLCs
LLCs (limited liability companies) are flexible business structures that combine some advantages of corporations with the simplicity of sole proprietorships or partnerships. “Like corporations, LLCs provide a certain amount of personal liability protection. Instead of shareholders, they have members that sign an operating agreement specifying how the business will be run.
Where C corporations have a fixed structure made up of shareholders, directors, and officers, LLC members can structure the business as they wish. LLCs can run large businesses, and they can transition to become C corporations if they outgrow their LLC status.
For income taxes, LLCs are default pass-through businesses. The business income is attributed to the members, who then pay individual income tax on their earnings from the LLC. Record-keeping and company maintenance are less burdensome than for corporations. You’ll have to make sure you comply with LLC regulations in the state in which you founded the LLC.
A key disadvantage of the LLC structure lies in its ownership structure. Where corporation ownership is based on shares that can be bought and sold, the owners of the LLC are the founding members. How ownership is valued and changed has to be specified in the operating agreement. For example, a transfer of ownership might require the unanimous consent of the members.
If you need a flexible structure for an innovative business model, an LLC may be a good way to start. Make sure your operating agreement clearly defines how you will operate the LLC and make changes. Alternatively, C corporations offer a business structure geared more toward raising money and future growth.
Advantages and Disadvantages of a C Corporation Designation
If you want to raise money for your business concept and sell shares to investors, you’ll want to incorporate as a C corporation.
The advantages include the following:
- Limited liability: You are generally not responsible for the debts of the corporation. If someone sues the corporation, they usually can’t go after the personal assets of the shareholders.
- Ability to issue shares: Your corporation can sell shares to investors to raise money.
- Unlimited number of investors: This is important for growth.
- Unlimited classes of shares: Issuing classes of non-voting or limited voting shares allows you to keep control of the corporation.
- Ability to go public.:You can become a public corporation, selling shares in the stock markets.
Disadvantages include the following:
- Higher cost: The corporation is more expensive to maintain and administer because compliance with regulations means keeping extensive records.
- Double taxation: Corporation income is taxed at the corporate rate, and dividends issued to shareholders are taxed at the individual income tax rate.
- Losses are not deductible: Business losses can’t be deducted from owner/shareholder income.
If the pros and cons don’t help you decide how to incorporate, do more research on sites such as ZenBusiness. If you’re sure you need a C corporation, you can start the incorporation process.
How to Form a C Corporation
To file Articles of Incorporation, you need a unique business name and the name of your registered agent. In today’s business climate, you’ll probably need a domain name for email and a website. If you issue shares, you may want a shareholder agreement. Make sure you keep the required records of the incorporation process. The steps for starting your business are detailed below.
Choose an available name for your corporation
For most jurisdictions, your name has to be appreciably different from other registered names. It can’t include protected terms such as “engineer” unless you have such a professional on staff. Usually, it must include a term such as Inc. or Corp.
Some states let you reserve business names before incorporating. To reserve a name, take advantage of the ZenBusiness Name Reservation Service to secure the name you want. Once you have chosen your name, you may want to consider registering a logo as a trademark. Another popular strategy involves registering a DBA (doing business as) name for marketing your business under a different name. Find out more about incorporation and DBA names on the ZenBusiness Incorporation Page.
Register an internet domain name
You need a domain name if you’re planning to create a company website and email addresses. To find and register your domain name with an internet registrar, use the ZenBusiness Domain Registration Service. Combined with the name reservation service, you’ll be able to get matching company and domain names. This helps your business stand out.
Form your initial board of directors
You need directors before you can file your registration papers. The directors are responsible for the company and their names are usually included in the incorporation filings. You have to define their roles and list their responsibilities. Once you are incorporated, your directors are elected by the shareholders and the officers of the corporation.
Choose your registered agent
Most states require corporations to have a registered agent with a physical address in the state where the business was incorporated. The registered agent must be able to receive mail and legal documents during normal business hours.
Use the ZenBusiness Registered Agent Service to fulfill this requirement.
File the Articles of Incorporation in your state
Make sure you have all the information requested on the incorporation forms and fill them out for the state in which you are incorporating. Some states have special requirements such as statutory publication, so check the laws in your state. Typical information required includes the following:
- Business name and address
- Registered agent’s name and address
- Business products and services
- Names and addresses of directors and officers
- Number and classes of shares available
- Name of person filing the articles
Draft and sign corporate bylaws
It’s a good idea to prepare corporate bylaws even if they are not required by your state. Bylaws detail how the board of directors will operate and how the board will run the company. Typical topics describe how meetings of the board and annual general meetings are run. They can also detail how bylaws can be changed and how directors are appointed and removed. If your state requires them, make sure you know where to submit them.
Create a corporate record
Corporations have an obligation to keep good records. The Articles of Incorporation and any other founding documents should be kept in a secure location. Usually, minutes of board meetings and records of annual general meetings are part of the corporate records. The intention behind keeping centralized records is to be able to easily demonstrate compliance with state and IRS regulations.
Initial director/shareholder meeting
At the first meeting of the directors/shareholders, they have to approve the incorporation and elect a board of directors. If you have bylaws detailing how meetings should be called, make sure that you have followed them closely. The meeting kicks off the formal operation of the corporation and also approves or changes any bylaws.
Prepare a shareholder agreement and issue shares
If you want to issue shares, you should prepare a shareholder agreement. Often, corporations approve additional shares and use them to raise funds for expansion or new initiatives. A shareholder agreement describes the rights and responsibilities of the shareholders and can include their voting rights and rules governing the sale of shares. The process of issuing shares has to comply with the regulations of your state, so make sure you follow them carefully.
Apply for required permits and licenses
Licenses and permits vary by industry and may be required at the federal, state, and local level. Many municipalities require a business permit, and depending on the business, other permits and licenses may be required as well. Most permits and licenses have to be obtained before starting operations, so apply early. ZenBusiness can help you determine what licenses and permits you will need through our business license search report.
Confirm your corporate tax status and obtain an EIN
By default, your corporation is a C corporation for tax purposes. If, at your initial meeting of directors/shareholders, you all decided to become an S corporation, you have to submit the corresponding application. Either way, you’ll need to apply for an EIN (Employer Identification Number). Use the ZenBusiness Secure an EIN service to get your EIN for federal tax purposes.
A C corporation is a great business structure for someone who has an attractive business concept and who wants to raise money from investors. It lets you issue shares, grow your business, and eventually take it public.
The first step is to register the corporation. ZenBusiness can help with many of the steps and guide you to a successful conclusion. Start the process today.
C Corporation FAQs
What does the C in C corporation stand for?
The C relates to the relevant tax code subsection.
Can I change from an LLC to a C corporation?
Yes, most states allow LLCs to change entities through filing the proper article changes. Members become shareholders, and the business becomes a C corporation.
Can I change from an S corporation to a C corporation?
Yes. When you incorporated, you applied to become an S corporation. If you revoke that, you can become a C corporation.
How is a C corporation taxed?
A C corporation is taxed on its income at the corporate tax rate.
Do C corporations pay the highest taxes?
Not necessarily, because a business’s tax rate and amount depends on each company’s unique situation. Corporate tax rates may be lower than those of some individuals. The income of pass-through corporations is taxed at the individual tax rate.